Debt Scams

When you are up to your eyeballs in debt, praying for a step-stool, sometimes life–more accurately, con-artists–try to trip you when you are vulnerable and look for a solution.  They aren’t muggers on the street.  They come at you wearing ties, invite you to a real office, with real furniture and a real nameplate on a real desk.   They are a real company, but that doesn’t mean they aren’t trying to scam you out of the little money you have left to put towards your debt.

Yes, I am talking about debt management scams.  These scams come in 4 main varieties.

Debt Settlement companies instruct you to stop paying your bills completely and send them the money instead to be placed in a settlement fund.  When your creditors get desperate enough, they will be willing to settle for pennies on the dollar.

In theory, this can be a good strategy for some debtors.  Unfortunately, it has some drawbacks, even if the company is legitimate.   They tend to charge high fees as a percentage of your deposits.  Some take another fee when a settlement is accepted.   The entire time you are building your settlement fund, your credit rating is sinking, leaving you open to being sued or garnished.  The bad companies take the fund and run, while even the good companies can’t guarantee your creditors will play ball.

Ultimately, they aren’t doing anything you can’t easily do yourself.    If you want to go the settlement route, stop making your payments and funnel the money into a savings account that you will use to offer settlements from.  It takes discipline, but there is no upside to paying someone else for the same function.

Debt Management plans are used when you owe more than you can afford to pay. These companies work with your creditors to adjust interest rates and minimum payments and they try to get some fees waived for you.

A good company will work with you and your creditors to make sure everyone is working together towards the goal of eliminating the debt.   A bad company will tell you they are working with your creditors while ignoring any contact from the creditor.  They’ll tell you the creditor isn’t willing to negotiate while never stepping up to the negotiation table.   Another trick is to offer the creditor a set payment, with a “take it or leave it” clause.  Any input from the creditor is interpreted as a refusal to participate.   This, coupled with high fees paid by the debtor, make debt management firms a risky proposition.  Most states require the firms to be licensed.  Check to make sure they are before giving them any information.

Debt/Credit Counseling companies work with you to establish a budget and eliminate expenses; in effect, they are training you to be in control of your finances.  They are often organized as a nonprofit, but not always.

Some–the sleazy ones–lie about what they are doing, or attempt to misconstrue what you are agreeing too.   Be careful not to use your home as collateral to consolidate unsecured debt and don’t walk into a Chapter 13 bankruptcy without that being your intention.  Both of those are common debt counseling scams.  If the company isn’t able to provide all of the details of a transaction–company name, address, licensing information–or they aren’t willing to spend as much time as necessary explaining the details of the transaction, walk away.   This is your life, you are in charge of it.  Don’t let anyone bully or prod you into signing something you aren’t comfortable with.

Credit Repair is almost always a scam. There are ways to get correct bad information removed from your credit report.  If the information is correct, those methods are illegal.   There are two legal methods to repair your credit.  First, stop generating bad credit.  Make your payments on time and eventually, the bad items will fall off.   Second, write letters disputing the actual incorrect items on your credit report.  There are no quick fixes, and anybody telling you different is flirting with a jail sentence, possibly yours.

How do you avoid the scammers?

  • Be skeptical. If it looks to good to be true, it probably is.  There is no such thing as a magic wand to fix your credit and make your debt disappear.  Bankruptcy + 10 years of your life is the closest thing to magic credit repair in this world.
  • Only use a legitimate credit counselor. Verify them through the Better Business Bureau and the National Foundation for Credit Counseling (1-800-388-2227 or www.nfcc.org)
  • Check the license. Most states require credit and debt counselors to be licensed.  If they’re not, run away and report them.
  • Read the find print.   Don’t sign anything you don’t understand.  Like every other piece of your financial life, own the transaction. Know what your are doing, or don’t do it.
  • Are they willing to work with you? If they’ve got a generic plan that doesn’t account for your specific situation, they are probably a con.  At the very least, they are a worthless company and a waste of both time and money.
  • Are they willing to work with your creditors? If not, they won’t be accomplishing anything for you.
  • How much do they cost? Higher fees may not be an indicator of a scam, but call around and find out if they are in the right ballpark.  Triple or quadruple the going rate is a sign of someone who will disappear late one night, with your hopes, dreams and savings in tow.
  • Above all else, trust your gut. If it doesn’t feel right, it probably isn’t.  There is nothing a counselor can do that can’t wait a few days while you check them out.

There is no magic bullet to kill debt.   You’re not fighting a werewolf, you’re fighting a lifetime of bad or unfortunate choices and circumstances.  It’s important to keep a realistic outcome in mind.

Update:  This post has been included in the Carnival of Debt Reduction.

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Scamming Disaster Victims

As we leave flooding season here in Minnesota, it’s important to remember that there are low-lifes who don’t mind preying on people when they are at their weakest and most vulnerable.  That’s true in many situations, but the one I’m talking about specifically is the post-disaster scam.

The most prevalent is probably the home-repair con.  If you have damage to your home from a disaster, be prepared to have people knocking on your door offering to fix your house.  We had a nasty hail storm a couple of years ago and were plagued with contractors for months.  Most of these were not con-men, but it is a safe bet that some were.   There are two basic home-repair cons after a disaster.

The first is to over-promise and under-deliver.   These people may just be inexperienced, but if someone claims to be able to replace your roof, your siding, and your deck for half of what anyone else is offering, run.   The solution is to get multiple quotes and to check licenses and references.   Then, get a written estimate.   No reputable company will complain about any of that. If it feels to good to be true, it probably is.

The second common home-repair scam is to take your money and run.   Most big contracting companies want to deal with your insurance company directly.   That’s because they know they can pad the labor costs and add a mark-up to materials.   Some just want to get the insurance money and run.  Either way, I insist on dealing with the insurance company myself, so I can pay the contractor when the work is finished to my satisfaction.

Another common scam is the advance-fee loan con.   This is perpetrated by scum preying on those people unfortunate, unlucky, or unwise enough to not have insurance to cover disaster damage.    They will promise below-market interest rates, fast closing, and no credit check.  All you have to do is give them a large down payment to seal the deal and they will “guarantee” the loan.   In my world, guarantee does not refer to the art of leaving the state with someone else’s money, but that’s how this scam ends.  Once again, don’t fall for “dream deals”.   Never give money to a company you haven’t verified is legitimate and never(ever, ever, ever) give money or personal information to a stranger over the phone.  If you didn’t initiate the contact and verify the company, don’t do business with them.

The third major con attacks the generous nature of most people when faced with another’s hardship.  The charity con.   Donating money to help people in need is an honorably act.  Please make sure that you are donating to an actual charity, not a scam artist with a credit-card machine.   If you didn’t initiate the contact, hang up and verify the charity is legitimate, then call back and donate money on your own.  You can verify a charity’s status by contacting your state government, usually the Attorney General’s office.

As always, you are in charge of your safety and security, both financial and otherwise.  Don’t let yourself be scammed.

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